Alert September 30, 2008

FDIC Issues Interim Rule on Deposit Insurance Coverage of Revocable Trust Accounts

The FDIC issued an interim rule (the “Interim Rule”) which the FDIC stated is intended to simplify and modernize its deposit insurance rules for revocable trust accounts.

Under the FDIC’s coverage rules, there are two types of revocable trust accounts insured: informal trust accounts and formal trust accounts.  Informal trust accounts are comprised of a signature card on which the owner designates the beneficiaries to whom the funds in the account will pass upon the owner’s death.  Informal accounts are sometimes called “payable-on-death” (POD accounts), “in trust for,” (ITF accounts) or “Totten Trust” accounts.  Formal revocable trusts are accounts established in connection with estate planning (e.g., living trusts, family trusts, marital trusts, generation-skipping trusts).  Prior to the Interim Rule, the FDIC rules provided that both informal and formal revocable trust accounts were insured up to $100,000 per “qualifying beneficiary” designated by the account owner.  Qualifying beneficiaries were limited to the account  owner’s spouse, children, grandchildren, parents and siblings.  The per-qualifying beneficiary FDIC coverage was separate and in addition to the $100,000 coverage that the qualifying beneficiary would receive on his or her own account or accounts at the same bank. 

In the Interim Rule the concept of “qualifying beneficiaries” has been eliminated.  The relationship of the beneficiary to the trust account owner no longer affects deposit insurance coverage.  Under the Interim Rule, a trust account owner with $500,000 or less in revocable trust accounts at a single bank is insured up to an amount equal to $100,000 multiplied by the number of different beneficiaries.  The FDIC stated that this will apply to the vast majority of revocable trust account owners.  For revocable trust account owners who have more than $500,000 in one bank and who have named more than five different beneficiaries in the revocable trust or trusts, the maximum coverage is the greater of $500,000 or the aggregate amount of all of the beneficiaries’ proportional interests in the revocable trust or trusts limited to $100,000 per beneficiary.  As the FDIC points out, the “impact of the [Interim Rule] results in no depositor being insured for an amount less than he or she would have been entitled to under the former revocable trust account rules.”

In addition, the Interim Rule provides that in determining FDIC coverage for living trust accounts, a life estate interest is valued at $100,000 and irrevocable trusts that spring from a revocable trust upon the death of the irrevocable trust account owner are insured under the revocable trust rules.

The Interim Rule became effective on September 26, 2008, and the deadline for comments is December 1, 2008.